Supercharged Free Ports in the United Kingdom: Politics, Legalities, and Geoeconomics

As a result of the Brexit, the UK is now legally allowed to create Special Economic Zones. Some in the UK have suggested created freeports to mitigate the impact of the hard Brexit.
September 14, 2019
September 15, 2019

The situation in Westminster

Since the Government’s decision to suspend parliament for a period of 5 weeks late last month, the House of Commons has been in a state of tumult. The previously agreed upon Brexit deadline of October 31st is fast approaching, and no deal yet seems to be in sight.

The last week in the House of Commons has been particularly active. Prime Minister Boris Johnson and the Conservative Party lost a vote in the House of Commons on the 3rd of September regarding who will be the arbitrating authority on the Brexit deadline, scheduled for the 31st of October this year.

The vote decided that the House of Commons will be the deciding authority on the Brexit timeline. This means that the opposition Labour party as well as around 20 Conservative MPs may likely vote for a delaying of Brexit until January 31st, 2020 - a problem for the existing Tory minority government that is primarily running on fulfilling the 2016 referendum decision to leave the EU.

As a response to this vote, PM Johnson called for a general election well ahead of schedule. The next GE was supposed to be held on May 5th, 2022 - however, the motion by Johnson would have seen it moved to October 15th of this year. This would place the vote 2 days before the EU council meeting on the 17th and 18th of the same month. [27]

However, on the 4th of September, many in the House of Commons abstained from the motion for General Election, and it did not pass. The next step for PM Johnson will be appealing to the House of Lords for a positive decision.

The House of Lords has agreed to process a backbench bill seeking to block a no-deal Brexit, as Boris Johnson prepares to make a speech calling again for Labour to allow a general election. The question of General Election will be voted on again by MPs on Monday and presented for royal assent. [28]

At the time of writing, it remains to be seen what decision will be made by the Houses of Lords and Commons. We will attempt to report on the less dynamic part of the Hard Brexit story in this article and leave the political aspect for later, focusing on (primarily) the Conservative party’s medium-term plans for a Hard Brexit.

Free Ports: A way to transition into a no-deal Brexit

"Let us begin work now to create free ports that will drive growth and thousands of high skill jobs in left behind areas,” announced newly-incumbent Prime Minister of the UK, Boris Johnson, at his commencement speech at 10 Downing Street [1], on July 24th.

Boris’ tenure as PM will most likely be marked by his handling of the Brexit transition that is supposed to take place on October 31st. As a no-deal Brexit seems increasingly likely, proposals to create Free Ports in the UK have been undergoing serious discussion [2].

Free ports are geographic areas designated by the government in which regulations differ from the rest of the country. Most often, this means reduced tax rates which encourage economic activity. That means that firms operating in such a zone can defer the payment of taxes until the zone’s products enter their home country or avoid taxation entirely by bringing goods into the zone for value-added activities, but then re-exporting the goods.

The idea of creating Free Ports rapidly grew in popularity after the 2016 election, with organizations such as the Center for Policy Studies promoting the concept [15].

In October 2017, then PM Theresa May visited the Tees Valley Port in the north of the country [3]. There, she was presented with a master plan laid out by the Mayor of Tees Valley, Ben Houchen. The plan outlined how the South Tees Development Corporation (STDC) could transform a derelict 4500-acre plot into a bustling free zone [4]. Mayor Houchen remains a major contributor to these talks today, as one of the early adopters of this idea.

From left to right: Then-PM Theresa May, PD Ports COO Jerry Hopkinson, Tees Valley Mayor Ben Houchen – August 2017

Serious discussion within the House of Parliament had only caught up around March 2018 [5]. The key persons to note in this development are Treasury Secretary Robert Jenrick,  International Trade Secretary Elizabeth Truss, Tees Valley mayor Ben Houchen, and conservative MP Martin Vickers. Trade Secretary Truss has additionally assembled a Free Port advisory panel to gather best practices from successful Free Zones and Ports from around the world [2].

Members of the panel include:

• Tim Morris, CEO of UK Major Ports Group

• Richard Ballantyne, CEO of British Ports Association

• Dr. Meredith Crowley, Trade Economist, University of Cambridge

• Henry Overman, Professor of Economic Geography, London School of Economics

• Dan Korski, CBE, Founder, Public

• Dr Eamonn Butler, Director, Adam Smith Institute

• Tom Clougherty, Head of Tax, Centre for Policy Studies

• Emma Jones, MBE, Enterprise Nation Founder

• Ben Houchen, Tees Valley Mayor

Public sentiment on Free Ports

There appears to be growing public support for Free Ports in the UK business community

Firstly, one of the largest construction firms on the planet, Mace Group, who constructed two of London’s famous skyline buildings, the Eye and the Shard. Mace has issued a paper in which they explain that the creation of “Supercharged Free Ports” would boost international trade by £12 billion and add £9 billion a year (double the current economic output of York) to the UK’s GDP. [7]

The UK’s International Trade Secretary, Elizabeth Truss, had been particularly vocal on the subject: “As liberalised zones with reduced tax and red tape, goods will be able to come into our country, see value added by British entrepreneurs and engineers, and exported back onto the global market without the burdensome paperwork and needless bureaucracy that holds back free enterprise.” [8]

Free Ports are especially well-received by the business community of Northern England. This support of the North through free zones was made clear by conservative MP Martin Vickers, who chairs the All-Party Parliamentary Group on Freeports: “We talk a great deal about rebalancing the economy and ending the north-south divide. That is a mission of every Government, but we have yet to achieve it in any meaningful way.

In 2016, the northern economy created £330 billion of economic output, but had the north and south been balanced, it would have been about £400 billion. That is £70 billion more—equivalent to £15,000 per household in the north of England.” [9]

PD Ports’ COO, Jerry Hopkinson (Pictured, right), said: “Free Port status at Teesport would act as a catalyst to remove trade barriers and enable industry to thrive; creating employment and capitalising on the readily available skills the region is globally renowned for.”

The All-Party Parliamentary Group on Freeports numbers 5 representatives – 3 conservative, 1 labour and 1 from the Scottish National Party. Unfortunately for this group and the advisory panel mentioned above, the positive sentiment toward Free Ports in the UK is not universal. [10]

Pushback on the idea of Free Ports

Criticism has arrived from all sides – primarily from opposition parties in the UK, the EU Parliament, EU Commission, and several prominent experts worldwide.

Lib Dem MP Ed Davey claimed: "We should be leading the world in business transparency, not promoting structures that have the potential to facilitate money laundering." The European Parliament's report warned freeports were "conducive to secrecy" and pointed to the role they played in revelations contained in the Panama Papers leaks [12].

Other reports also surfaced: the UK Trade Policy Observatory evaluated that “Policy impact evaluations often suggest that the net benefit of free zones is limited,” as it said in a research paper earlier this year. “The US experience is not very illuminating: whilst there are many jobs in the U.S. Foreign-Trade Zones, there is little evidence of how many are net creations.” This means that the key issue that critics cite is the fact that Free Zones will not, in fact, create new jobs or value, but will shift it away from other parts of the country [13].

Several experts including the UKTPO have expressed doubts as to the upside of free ports in the UK.

With these criticisms in mind, we’ll now go into how, specifically, these potential “supercharged free ports” augment existing ports in the UK, as well as how they’re different from free ports elsewhere in the world. It is also important to note what it means for people doing business with the UK, as well as British firms. To that end, it is necessary to refer to the UK regulations on free ports and similar systems.

The regulation as it stands

It is important to highlight the difference between “enterprise zones” “free ports” and “supercharged free ports” in the dialogue shaping up in Westminster.

The 2011 budget issued by the UK Treasury [17] outlines that 21 new “enterprise zones” be created: 10 were decided on by legislators, 10 were open to a bidding process, and 1 was to be created in London on the prerogative of the city mayor. Businesses operating in enterprise zones were to be exempt from a business tax no larger than £275,000 over a 5-year period [6].

As the laws for enterprise zones have been on the books through the Customs and Excise Management Act of 1979, this gives the Treasury the right to designate "any area in the United Kingdom as a special area for customs purposes.” [18]

October 10, 2018 saw several discussions in parliament regarding Britain’s shipping, fishing, and offshore oil sectors.

Since the 1979 act, the number of enterprise zones in the UK had expanded – with Scotland and Wales receiving a large amount of enterprise zones. As of March 2016, the number of enterprise zones in the UK numbered 63.

The “supercharged free port” project would have as a goal to “stack” enterprise zones onto free ports, which would allow for both tax incentives and streamlined regulation on the domestic side, as well as import duty waving on the international side [16].

The Taxation & Cross-Border trade act of 2018 specifies Her Majesty’s Revenue & Customs’ (HMRC’s) powers regarding the designation of certain areas as free zones:

The powers in Schedule 2, paragraphs 2 (1) and (3) allow HMRC to make regulations setting out the requirements for persons to have premises approved by HMRC and the requirements and restrictions that goods are subject to while being held in an HMRC-approved premise or a free zone.”

What this means is that HMRC is the sole arbiter of state fiscal matters in the UK’s forthcoming “supercharged free ports”. To expand, another quote from the T&CBTA2018:

The power in Schedule 2, paragraph 2(4) allows HMRC to make by regulations any other provision that they consider appropriate for the purposes of import duty in relation to goods kept in free zones. This could include, for example, imposing a requirement that goods be presented to customs when entering or leaving free zones.” [19]

With the HMRC powers laid out as they are, as well as the support PM Johnson and parliamentary groups are lending to the “supercharged free ports” policy, it is highly unlikely that the HMRC will attempt to levy high (or any) rates within these new zones. The next question regards geo-economics: which are the geographic sites most likely to benefit from the new policy?

Potential sites

In the 1980s, the first enterprise zones were created – these zones lasted until 2012 when the coalition government shut them down. During the 1980-2012 period, there were free port areas in Liverpool, Southampton, the Port of Tilbury, the Port of Sheerness and at Prestwick Airport. One zone that was created at this time remains open as it is a crown dependency and was not subject to parliament decisions – that is the free zone on the Isle of Man. [20]

Former Treasury Secretary Chris Walker maintained that declaring seven northern ports (Grimsby & Immingham, Liverpool, Manchester Airport, Hull, Tees & Hartlepool, Rivers Hull & Humber, and Tyne) as free ports would boost trade by £12bn and create 150,000 jobs. Other than these ports, Milford Haven and London Gateway are also being considered. [21]

Some have even suggested Belfast region into a supercharged free port. Tina McKenzie, head of policy at the Federation of Small Businesses in the region, claimed it “would be transformational for this society, whether you are a unionist, nationalist or neither”. [22]

Belfast could be the heart of an especially optimistic project: turning all of Northern Ireland into a free port for easier trade with their southern neighbours

In the event of a no-deal Brexit, trade with Ireland would be subject to the tariffs the EU has registered with the World Trade Organisation. As a temporary measure, the UK government announced it will not apply tariffs in the first instance to goods entering Northern Ireland from Ireland.

Tees Valley & Teesside Port

Tees Valley remains the most closely-observed project in this space, as it is the “quintessential northern industrial area that has been left behind” – which is the constituency of many MPs backing the free port project in Parliament (one such is Hon. Martin Vickers, mentioned above as the presiding member of the All-Parliamentary Group of Free Ports)[9]. An enterprise zone already exists in the Tees Valley area, but plans for a “stacked” free port and enterprise zone are in the works at the South Tees Development Corporation.

The reasons listed for the strong consideration of Teesport include “strong structural advantages” such as a deep-water port and strong intermodal capabilities – as it stands, the facility handles 5,000 vessels and 40 million tonnes of cargo a year. Teesside’s manufacturing center is close to the future site of the port, which focuses on chemicals and engineering. [23]

Left and center: Teesside Mayor Ben Houchen and Redcar’s Conservative MP Anna Turley, Two of the most well-known crusaders for Teesside’s free port status.

Ms Turley and mayor Houchen are the two major leaders of this development, and we can expect Tees Valley, Teesside and Teesport to stay in the public eye until Brexit. Ms Turley said to the House: “Incorporation of the STDC area, together with the Teesport facility and in conjunction with adjacent industrial sites such as Wilton and North Shore, into a free port area would help this region build upon its current strengths in chemicals, steel, energy and logistics and realise our vision to become the most attractive place in the country for high value manufacturing.[24]

Conclusion: What this means for UK firms

The suggested ‘Supercharged Free Ports’ would be located around existing industrial clusters across the North to turbo-charge economic growth and trade [25]:

1. Immingham & Grimsby Ports

2. Hull Port

3. Rivers Hull & Humber

4. Tees & Hartlepool

5. Liverpool

6. Tyne

7. Manchester Airport

These firms, as outlined above, would have streamlined business regulations, lower or no business taxes, and would have a favourable tariff regime. As good as this is for the businesses setting up shop in the supercharged zones, the question remains how beneficial this will be for the businesses outside them as well as the country at large.[26]

What this means for those doing business with the UK

As a hard Brexit seems like the most likely outcome and trade deals are yet to be negotiated, being wary of WTO specifications is advised for anybody doing business with the UK. The potential savings that chemical, manufacturing and shipping businesses in the UK will capture through this development may throw European competitors off-balance for the first time in a long while. [14]

Adrianople group will remain vigilant of new developments in this space and will keep you informed.